What is the worth of being right most of the time if in the end you end up loosing money? Probably there is no worth whatsoever. That´s why it is important to be right at the right time about things of importance.
You can be right on every one of the first six factors of the CANSLIM method; however, if you are wrong about the direction of the broad general market […] you will loose money.
William O`Neil
That´s why it is so important being able to determine whether you are in a bull or a bear market, in which stage the market is in and what the future prospects are. As expected this seems to be no easy endeavor though and the ability to pick the market top seems like an art rather than a science.
The best way to do this is to “follow and understand every day what the general market is doing”. Reversals in the market can occur any day and important signals may occur any time. What are volume and price doing? Is the top of a market reached? But how can a market top be detected? Firstly, a rule of thumb might to be considered. If you have lost money on your last five trades, there is a high likelihood that you are in a bear market. Besides that, there are many indicators and all are to considered as little peaces of the big puzzle.
One of these peaces may be the fact that during an uptrend volume on a given day may increase considerably over the prior days volume with price averages remaining stagnant. This is a sign of liquidation near the market top and usually is followed by four days of sell off. After this time, the market generally will try to rally which can fail in several ways. Decreased volume, poor net price progress or a market recovery constituting less than 50% of the initial drop might constitute these failures. In case of a situation like this a market top seems likely.
Furthermore, an important indicator to watch is the general interest rate. Even though this seems highly simplistic O´Neil argues there to be a high likelihood of a coming recession in cases of three consecutive raises of the interest rate. As a further rule of thumbs stocks tend to behave in different ways throughout the day in bear and bull markets. While stocks during bear markets often open up strongly and give away profits until the close of the day, stocks likely open down in bear markets and come back during the trading day. Especially important to observe are leading stocks of a market. How do the leaders behave? Are strong or weak stocks the leaders? All this allows for a general perception of market strength. Additionally, it may be advisable to listen to investment advisors – but in a special way. The cumulative percentage of professionals being bearish versus bullish is to be respected. Most investment advisors are bearish near market bottoms and bullish near market tops and in this way manage to be wrong most of the time.
Of the CANSLIM method determining the position and movement of the market definitely seems like the most difficult but most important indicator to me and experience probably is indispensable. Thus, as indicated already, daily studies of the market seem to be necessary in order to master this key of successfully investing.
Best,
Nils
